Principal Issues: 1) Are cash back incentives received on the renewal of mortgages on rental properties taxable to the borrowing corporation? 2) How are any repayments of the cash back incentives treated for tax purposes?
Position: 1) Cash back incentives may be included in income pursuant to subsection 9(1) or paragraph 12(1)(x) in the taxation year the inducement is received. 2) In circumstances where an inducement is repaid, paragraph 20(1)(hh) may apply.
Reasons: Question of fact. The incentive is likely taxable under subsection 9(1) or paragraph 12(1)(x) as the mortgaged properties are rental properties. A repayment of such amount may be deducted if the conditions of paragraph 20(1)(hh) are met.
XXXXXXXXXX 2016-068127 Christina Teow March 21, 2017
Dear XXXXXXXXXX
Re: Taxability of cash back amounts on the renewal of mortgages on rental properties
This is in response to your email of December 27, 2016 requesting an interpretation regarding the income tax treatment of cash back incentives.
In the situation described, a corporation (the “Borrower”) receives cash back amounts from a bank at the time it renews mortgages relating to its rental properties. The cash back amount must be paid back to the bank if certain events occur during a term of 3 to 5 years. You have asked if the cash back amounts are to be reported for income tax purposes. Furthermore, you have also asked if a Borrower can claim the repaid amount if required to do so by the bank.
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016. We are, however, prepared to offer the following general comments, which may be of assistance.
Whether an amount is considered to be interest is a question of fact. “Interest” is not defined in the Act. Income Tax Folio S3-F6-C1, Interest Deductibility, states that interest is generally accepted to mean an amount that has met the following three criteria:
- the amount must be calculated on a day-to-day accrual basis,
- the amount must be calculated on a principal sum (or a right to a principal sum), and
- the amount must be compensation for the use of the principal sum (or the right to the principal sum).
It is our view that the cash back amount would not be considered to be interest. However, the cash back amount may be taxable under other provisions of the Act, such as subsection 9(1) or paragraph 12(1)(x) of the Act.
Under subsection 9(1) of the Act, a taxpayer's income for a taxation year from a business or property is the profit from that business or property for the year, subject to the rules in Part I of the Act. In general terms, the tax treatment of an amount received in the course of earning income from a business or property is determined by the application of well-accepted business principles. Where subsection 9(1) of the Act does not otherwise apply, the amount received might be included in income by virtue of paragraph 12(1)(x) of the Act.
Paragraph 12(1)(x) of the Act will generally apply to an amount received in the course of earning income from a business or property unless it was otherwise included in income, or deducted in computing any balance of undeducted outlays, expenses, or other amounts, for the year, or a preceding year, under some other provision of the Act. Therefore, where an inducement is received by a taxpayer in the course of earning income from a business or property from a person who pays the amount in the course of earning income from a business or property, such an amount would be subject to paragraph 12(1)(x) of the Act. Based on the information provided, it appears that this condition is likely met as you have indicated that the Borrower is using the rental properties on which there are renewed mortgages to earn rental income. With respect to the timing of the income inclusion, paragraph 12(1)(x) of the Act provides that amounts received by virtue of this paragraph are included in income when received by the taxpayer in the year in the course of earning income from a business or property. A deduction may be available under paragraph 20(1)(hh) of the Act in respect of the repayment of an inducement that was previously included in income under paragraph 12(1)(x) of the Act, provided the requirements of that provision are met.
We trust our comments will be of assistance.
Yours truly,
G. Moore
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch